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Health Reform Law’s Effect on the Income of Various Groups

By February 19, 2014Commentary

Although it was not likely one of the intentions of the federal reform law, its coverage, subsidies, tax and penalty provisions will have a substantial effect on the incomes of most Americans.  An analysis from the Brookings Institution quantifies these effects, with the surprising finding that many middle income people are getting nailed.    (Brookings Paper)   The analysis is as of 2016, so it likely understates the effect of the law, as the full penalties are not in force then and other provisions will still be being implemented, particularly if the Administration keeps delaying deadlines set in the law, like the employer mandate.  The analysis acknowledges that increases in the cost of health benefits to employers are likely to result in lower wage compensation for workers.  Some of the other major effects include basically free expansion of Medicaid to lower-income or non-working people; subsidies for lower-income people who purchase insurance on the exchanges; new employer-based health insurance pursuant to the employer mandate; more cost-sharing for Medicare beneficiaries due to the cuts in payments to Medicare Advantage plans and Medicare providers; penalties for individuals who don’t get insurance or employers who don’t provide it; and increased taxes on higher-income Americans.

The analysis uses at least one method of calculating the income effects of the law that is fair, it uses the full value of insurance.  Alternative methods in the analysis border on the absurd, like assuming Medicaid coverage has no economic value to a very poor family.  And they acknowledge that their analysis understates the tax effects on higher income people.  And their assumptions about the number of people likely gaining new coverage are probably wildly overstated, based on experience to data and survey evidence.  And the Congressional Budget Office has just recently stated that the health law will likely result in two million fewer people being employed, which certainly has an impact on their income.

Using the fairest method, the analysis finds that the law will increase the income of the bottom tenth  by 5.9% and the bottom fifth by 5.3%.  On the other hand, every other income group loses income and that includes  a lot of people with low incomes.  For example, the next to the bottom fifth makes only $21,000 to $40,000.   Given that Brookings is a left-leaning group, the analysis paints a grim picture of its effects on the income of most Americans, income that would have been used for other purposes that likely have greater economic benefit.  And one gaping hole in the analysis is its failure to recognize that the law is pushing up health costs and health insurance costs, and that will cause a massive loss of income for anyone not able to partake of the freebie health care offered up by the Administration.  Of course, the economic effects of this and other Administration policies is making more and more of us poor enough to get these freebies.  That downward spiral, however, has an obvious and unpleasant end.

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